Vacation homes can serve as an excellent get-away for your family on vacations and holidays. However, most of the year, these homes stay vacant and they bring nothing of value during these times. To get the most value out of these properties, you can rent your vacation homes, allowing you to gain a considerable passive income throughout the year.
Despite being a seemingly simple process, renting out your vacation home can be a bit of a hassle as several lender rules apply to your property, making it an intricate process. Several tax rules also apply to your property, if rented out. Understanding all of these rules and regulations is the first step to renting out your vacation home. To ease this process, we shall review some of the lender rules to keep in mind while renting your vacation home.
Why Rent Out Your Vacation Home?
Renting out your vacation property can bring in a ton of benefits, and not just financial ones. From a stable cash flow to certain tax benefits, renting out your vacation home can serve as a lucrative investment.
Stable Cash Flow
Instead of leaving the property vacant, you can garner a significant income just by renting it out every then and now. However, your rental income will depend on where your property is located, as popular areas tend to bring in much more value, such as house for rent in Islamabad. Nevertheless, a stable income is still guaranteed which can later be used for emergencies or renovations.
Since renting out a property means that your vacation home is a business, you will become eligible for business-related tax deductions such as property maintenance costs, housekeeping, and restocking on essentials. Houses for rent in Karachi tend to have several tax benefits such as these. Moreover, having a business credit card for any expenses related to the property can help in organizing your costs, making it much easier to apply for these tax deductions.
Rental Property Managers
Most vacation home renters are unable to manage the property themselves. To ease these issues, rental property managers are easily available that will manage the upkeep and rental process of your property. They can even market your property to find tenants much quicker. This also ensures that your vacation home will be kept in perfect shape for you to use. Many houses for rent in Lahore are maintained thoroughly owing to these rental property managers.
Lender Rules for Your Vacation Home
Different rules and regulations are applicable based on the type of mortgage on the property or the duration for renting out the property. The rental income is taxed by the taxation authority; however, expenses on the property bring down the total taxes as businesses are eligible for tax benefits. Following are some of the rules on taxation for your vacation property.
The 14-Day Rule
As mentioned before, the taxes applicable on your vacation property depend on the duration your property is rented out for. If the property is rented out for less than 14 days a year, the income is not considered rental income and it is not taxed. This would mean that the property is considered personal property. However, renting the property out for even a day over 14 can bring in taxes for the property.
Property Rented for More Than 14 Days
If you plan on renting your property for more than 14 days a year, then it will be considered as a rental property and taxes will be applicable. However, this also brings in certain tax benefits that the businesses enjoy where several costs for upkeeping the businesses are returned through tax deductions. These deductions apply to certain factors such as maintenance expenses, property taxes, utilities, property manager fees, and depreciation.
These expenses are deducted based on the number of rental days. These expenses are calculated by dividing the total number of days the property was rented out by the total days the property was used for other reasons such as personal uses or maintenance. The final percentage that is calculated is the rental deductions from the overall expenses.
Property Used for Personal Use for More Than 14 Days
If the property is used for more than 14 days a year for personal uses by the owner, the vacation home will be considered personal property. This can serve as a loss for the owner as they still have to pay taxes on rental income, if the property is rented. Moreover, rental losses will not be deducted from the tax and there will be no tax benefits for the owner.
Tracking your personal use days is of utmost importance as the number of personal use days can have a dramatic effect on your taxes and tax benefits. However, days spent on repairs and maintenance or days when other family members use the property cannot be considered as personal use days. These distinctions are necessary to understand so that your personal use days can be properly documented.
Renting out your vacation home is a splendid idea for garnering a stable income on the side. However, keeping in mind the potential taxes and tax benefits is also important to consider. Moreover, different cities may have different taxation rates, as houses for rent in Faisalabad may be taxed at a different rate than houses for rent in Multan. Considering this difference is important when calculating potential rental expenses and tax benefits. To put your vacation home up for rent, head over to Graana.com – Pakistan’s first-ever online real estate market. Through the Graana.com property portal, your vacation home will never stay vacant.